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Netflix Decides The Free Market Isn't So Good After All, Wants Government To Step In

What a difference a month makes. On February 23, Netflix and Comcast announced a deal under which the video streaming service and the cable company would “team up to provide customers (an) excellent user experience.” Netflix said it worked “collaboratively” with Comcast and that the deal was “mutually beneficial.” So it was a little surprising that today, Netflix CEO Reed Hastings more or less blasted arrangements like that in a blog post on his company’s web site. Hastings wants the government — specifically the FCC, which will receive his remarks officially today as part of an open request — to widely expand the doctrine of net neutrality to cover not only end customers like you and me, but also the internal workings of the internet. And he specifically wants ISPs to apparently be responsible for bearing all the costs of carrying internet traffic. That this would be likely be beyond the legal authority of the FCC is almost beside the point. What Netflix is asking for is government interference in longstanding business practices on the internet. To get it, he’s apparently willing to engage in a lot of half-truth telling and vague accusations. And he wants to throw his own business deal under the bus.

The new neutrality

To date, net neutrality has been about protecting consumers from losing equal access to parts of the internet. You should be able to get to any web site or service without an additional “toll” and without that service being degraded in any way by your ISP. Because a federal court threw out the existing neutrality FCC rules in January, however, there is only one company currently obligated to abide by them. That company, ironically, is Comcast, which agreed to follow them as a condition of buying NBC Universal.

The deal Netflix and Comcast cut technically had nothing to do with the rules as I discussed when it was announced (“Comcast-Netflix Didn’t Violate Net Neutrality But It Wasn’t Benevolent, It Was Business“). But it did something important: By placing Netflix’s servers inside of Comcast’s network, it would give viewers the best possible performance when watching House of Cards or whatever else they were streaming. The three critical takeaways from the deal to remember are this (1) Netflix paid Comcast money (2) It was comparable to what Netflix would have paid a third-party to get you that content had the deal not been struck — likely it was less (3) In bypassing as many internet roadblocks as possible, the end result is likely better streaming performance for most people and only someone with deep pockets could make this kind of deal.

Netflix now wants some unspecified rules that basically make this kind of arrangement unnecessary because they believe Comcast, Verizon and other ISPs should simply cover all the costs of getting your their content without charging Netflix anything. Under Netflix’s terminology, this is called “strong net neutrality.” In actuality, what the company wants amounts to a regulation forbidding ISPs from recovering the cost of connecting to large content providers. Because Netflix is responsible for up to 30% of peak internet bandwidth, it has long relied on content delivery networks (CDNs) to stream its video. Those companies, like Akamai, have being paying ISPs to deliver traffic for more than a decade.

Separate and unequal

The reason why they pay is that as delivery mechanisms for Netflix — and many other large content providers — CDNs aren’t like other ISPs, which carry traffic both in and out regularly. Netflix is similar: You stream video from it, but you don’t send much to it. So Netflix eventually built its own CDN, an expensive proposition and the only reason it could even sit down at the table directly with Comcast. While ISPs don’t exactly make big profits from carrying CDN traffic, they do incur costs: network ports, power, system administrators. None of that comes for free. But most important, as Dan Rayburn of Streamingmedia pointed out to me, when a CDN pays an ISP to carry its traffic (through the “transit” providers that move those bits and bytes around), it gets a guarantee that the traffic will be delivered with a certain level of service. This means that you won’t suffer buffering while trying to binge-watch Orange is the New Black.

Comcast, Rayburn says, made a total of $30-60 million from agreements to carry traffic last year, a figure that’s extrapolated from public statements and company financials. If that sounds like a number the company really cares about or thinks is an important source of future revenues — a place where it intends to stick it to content providers like Netflix — keep in mind Comcast’s top line was close to $65 billion in 2013. So while the company may be marking up its direct costs of carrying traffic a bit, the total it earned is less than 0.1% of its revenues.

Hastings claims that ISPs are holding the company hostage, letting Netflix streaming quality go bad and then — once the ransom is paid — restoring quality. But that’s simply not what’s happening. Instead, Netflix today is trying to get you video through multiple CDNs and multiple transit providers (it has arrangements with several throughout the country to reach various ISPs and devices). Some of them, like Cogent, seem perpetually in battles with ISPs over upgrading connection points. Those upgrades, as described above, require actual monetary investments in equipment and man-hours as more and more data is pushed through saturated connections. Cogent has become a special kind of bottleneck because it has effectively oversold its capacity to deliver traffic to certain ISPs and then complains when those ISPs won’t spend money to help it keep its promises to others.

It’s too crowded in here

To understand the problem, imagine a gated community. More and more people are ordering things that are delivered by a shipping company called Netflix Deliveries. While the community has a half dozen gates, Deliveries keeps sending its trucks through one of the gates. Each time it tries to enter, there’s some delay to be let in by a homeowner, get through the gate, navigate to the home, etc.. Netflix could help by either (1) using multiple gates to create shorter and more diverse path or (2) agreeing to foot some of the bill for upgrading the intercom or gate system to make things faster. What it did with Comcast was actually a bit of both, but mostly the latter. When Netflix complains about slowdowns with certain ISPs, it’s mostly because it has a tendency — like the fictional Deliveries company — to push content through the same overloaded gates, Rayburn said. That’s true even though it could send some trucks through the other, less-crowded ones.

Now, what it wants is a government mandate that all “gate upgrades” be the full financial responsibility of the community or, in this case, the ISP. There’s no rationale for this, nor any specifics. Should Comcast, Verizon, et al. be required to spend whatever amount that Netflix demands on ports to carry however much traffic Netflix ends up sending? If Netflix customers adopt high-resolution 4K TVs en masse, quadrupling their bandwidth demands, presumably Comcast should just pay four times as much for network infrastructure to accommodate that, too?

The problem with this kind of doctrine is that it isn’t “strong net neutrality” at all. It’s “net neutrality for the strong.” While it’s true that this kind of rule won’t explicitly harm smaller content providers, the current system of requiring large ones to pay doesn’t either. When Comcast and Netflix announced their deal, we heard a lot about how the little guy was going to be shut out in the future. But in reality, the little guy is either going to escape the notice of ISPs until he’s big (and thus be safe by obscurity) or do business with a CDN, as Rayburn notes, to appear big and have nothing to worry about. In Netflix’s proposed rule, the very largest providers who bypass CDNs altogether could demand ever increasing amounts of resources from ISPs. And if they get rules written by the government that, for example, favor those with the biggest traffic commitments, that could end up hurting the little guy.

Of course, the whole thing could also backfire on Netflix. Once you start asking for regulations, you might not like what you end up with. That’s why for years, internet firms told the government to just stay out of the way and the net neutrality rules didn’t go into place until 2010 when the pendulum shifted from free-market ideals to fear.

The FCC, for its part, would be wise to stay out of the part of the internet Netflix is asking for help with. The back end has done just fine for nearly 20 years without interference and the Comcast-Netflix deal is actually proof of how the market solves problems the market is having. Besides, Rayburn says: “You’ve got Netflix, Level 3 and Cogent all complaining in the media and the public’s eye that they want changes. Not a single one of them is saying what they want.” That’s a troublesome starting point for a government agency to start making rules. It ought to stop before it begins.

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Every piece I’ve seen written on this issue seems to ignore one thing. All of Comcast’s ISP customers have already paid them what they asked, to deliver up to a certain number of bits per month, at a certain speed, from anywhere the customer may request.

To follow the gated community analogy, it’s as if Comcast approached the neighborhood and told all 100 homes within, “pay us $50 per month and we can provide you 10 deliveries per day,” installed one gate at the entrance to the neighborhood, then when the deliveries started backing up and their customers complained, they said the trucking company is the one who needs to pay.

Comcast is the one who oversold. Simple as that. If you sell me 50MB/s up to 250GB/month, and I pay the price you ask, then give me what you sold me. “Best effort” is no excuse. If you need to charge more, charge more, then I can decide if I will still be your customer. But do not say you cannot deliver the bits to me because I ask Netflix for them.

Yeah, have to agree here. Its definitely Comcast’s right to slow it down. But its horribly unethical to do something like and charge customers for it. If I pay for 50MB/s and Comcast is intentionally only allowing a faction of that through when I choose to use netflix. I’d expect my bill to reflect that.

Its comparable to paying for an all you can eat buffet, and being told you can only eat a quarter of a plate if you choose to eat seafood.

New Acts, ISP’s do not charge all subscribers as if they are the obese guy at the buffet. They charge on an average of all users combined. Now that bandwidth is increasing 30% on their networks, someone has to pay for the upgrades. Who should that cost be paid by?

Cogent is not the one that oversold Netflix. Other Major ISPs were not having the same issues with Netflix Content. The issue is that Verizon chose to not maintain keep sufficient hardware to accept the incoming network requests by COMCASTS PAYING CUSTOMERS from Cogent.

And if one were to look at the Profit Margins on the ISP Portion of the major ISP Providers you will see they are insanely high levels. The reason they are so high is because they operate as a virtual monopoly. Thus it is NOT a free market. In general, there is one and only one option and in many cases have bought off politicians to pass laws prohibiting competition from towns or communities forming their own ISP.

Netflix even offered to install and maintain “Caching” Servers for Comcast that would reduce the overhead experienced by Comcast and improve performance for their customers. This would have been no cost for Comcast and helped their customers and actually reduced the costs of providing services, but Comcast was not interested. Rather, they wanted to double bill for the traffic from both the person paying to receive it as well as the person to send it.

I don’t know the role of Cogent in this dispute, but an off hand claim that Comcast did not oversell the end users sounds simplistic. Comcast’s business model is based on overselling. I doubt it would be able to serve 25Mbps of data throughput to all of its users at the same time. It relies on the statistical rarity that every customers needs access at the same time. Streaming video complicates this assumption, as it is a continuous and steady level of burden on the network as long as TV show or movie lasts and people tend to watch around the same time. Now that there is congestion, either on the “on ramps” or in the last mile, how should we finance the upgrades? If we want to ensure transparency and content neutrality, Comcast should charge its end users, not the content owners.

tatilsever, you are correct, almost every ISP does not offer dedicated bandwidth. There is a business model that shows how much data is used and then how much can be offered. If the bandwidth used goes up, so do the ISP rates to customers. Simple supply & demand.

I must say that I agree with Netflix on this. I keep hearing that Netflix is being unfair by consuming a majority of traffic for Comcast and other ISPs. While at first glance it seems a reasonable to have Netflix pay for its usage, it isn’t. The fact of the matter is that customers are paying for this access already and Comcast and these other companies have over subscribed their networks. It is the responsibility of the ISP to scale the capacity of their infrastructure to match the usage patterns of its subscribers.

By allowing Comcast (and other ISP’s) to charge companies like Netflix for the right to deliver data to an ISP’s network they are effectively double dipping. Such limitations and controls fail to deliver the internet product they promised to their customers. Further it allows ISP’s to choose the winners and losers of the net. This type of charging is bad bad for the consumer and the internet as a whole. Regulation is needed in this regard.

Nobody wants to return to the days of AOL. Nobody wants their internet controlled like their cable channels, which is the direction these companies are trying to take the consumer.

The truth is, there isn’t double dipping. Comcast (and every ISP), needs a series of “on ramps” to its networks. Those aren’t free. When the on-ramps have equal and equivalent off-ramps, the cost of them is split evenly (settlement-free peering is a term you might hear).

When it’s unequal, the company that needs more on-ramps has to cover the cost. It’s not much money, but it’s not reasonable — nor has it been standard practice for well over a decade — to ask the party receiving the traffic to cover the cost of them. Now, Netflix is asking for just that.

No! The cost of the “on-ramps” belongs entirely to Comcast! The entire purpose of an ISP is to provide two connections: one to the internet, and the other to the customer. As customers, we buy a connection to the internet at a certain speed. The destination and direction of the data *do not matter* – we pay for a certain speed up and down. If customers are saturating Comcast’s links to the internet, then Comcast must pay to set up more links! It doesn’t matter if it is downlinks or uplinks. It doesn’t matter tha tmore data is coming in or out of the Comcast network – it’s just a connection medium, and it’s Comcast’s responsibility to provide it. If they have to charge more to their customers, so be it!

In many places, people only have one option for internet service. If Comcast is the only option you have, then they bear the only burden on improving the infrastructure. People are paying Netflix AND Comcast already for service.

If the city you live in starts having more traffic on a particular street, it’s the city’s responsibility to add more lanes or build alternate routes.

Richard, You have to understand that now ISP’s have to upgrade their networks so Netflix can make money. Who should have to pay for that upgrade? ISP’s were pushing that cost back to Netflix instead of the ISP’s customers. Someone will have to pay for the upgrades…

The reason the free market doesn’t work is BECAUSE the government (mostly local) has stepped in and protected the single provider monopoly in almost every city and county. They do this through franchising agreements, right of way restrictions, and zoning ordinances that prohibit outside antennas (so no satellite/wireless competitors) and above ground wires.

The local politicians get rich by selling the rights to the highest bidding cabal/teleco operators and thereby creating the monopolies. This results in the ISP’s/Cable OP’s Telcos being able to strangle that content providers. This is made worse when the service providers are also content producers.

The solution is for the government to abolish the ability of the local politicians to get rich and/or buy votes by aiding the monopolies. The communist, socialist, Marxist solution is for the local governments to either setup taxpayer subsidized “competition” to buy votes or for the local government to simply take over the private business and then use tax subsidies to buy votes.

The teaparty talibani christacrats are down with the government take over/tax subsidies because they want the power to force EVERYONE to take and pay for religious programming.

Both groups also want the ability to monitor and control what the citizens do and see that would come with complete government control of the wires and airways.

The CONSTITUTIONALIST, LIBERTARIAN solution would be for government to stop all the non-safety related regulation and actually allow the free market to actually work.

There is no free market when cable is a monopoly. Let every town in America have competing high speed internet providers and Netflix won’t have to pay a penny ever. Let it continue as a monopoly, then we need net neutrality.

Ivan, the “last mile” monopoly/duopoly is unfortunate (and arguably in some cases reprehensible). But that market power doesn’t extend to the way transit, peering and content delivery work. Those markets are quite competitive, which makes Netflix’s complaining hard to really understand.

This was a generally good informative article but I think the analogy falls apart when you realize that Netflix Deliveries paid millions to the for-profit entity running the homeowners association for the gate/intercom improvements AND ONLY WEALTHY ‘NETFLIX DELIVERIES’ CAN UTILIZE THAT FASTER GATE. Many of the homeowners that utilize Netflix may be happy with the faster delivery, but customers next year that want to use ‘Small Startup Deliveries, Inc.’ will be frustrated that their deliveries take longer because the company didn’t have the money to pay to use the fast-access gate.

1) It doesn’t work that way, as I tried to explain. The small startup is going to use a CDN as it grows. That CDN already has a service-level agreement somewhere upstream with Comcast. So long as it goes through a provider that isn’t overselling (e.g. Cogent), the startup will be fine.

2) That said.. What Netflix did in signing the deal in the first place was set the stage for a world where only rich companies like it have the best access. Exactly what you said is a threat >down the road< because maybe Verizon, Cox, AT&T decide that only companies with embedded content delivery (which costs real money to even build, forget the cost of the contract) are worth guaranteeing the best speeds for.

One has to ask this: Why did Netflix make a deal for preferred access and then rail against contracting generally? Or does it expect the regulations to require ISPs to put the Netflix CDN deep inside their networks? The latter seems so far beyond the authority of the FCC, I can't imagine that happening.

Two Things: 1) The CDN (Cogent and Level 5 at minimum) are the ones complaining about how the ISPs are behaving. They have issue that Comcast, for example, is highly profitable but will not update their network unless the CDN pays for the entire upgrade. This simply means that the ISP has an unfair advantage in their access to the end user and because they are effective monopolies in many areas they can dictate terms. They should be required to update their networks to meet their end users needs and not expect other companies to pay for them. This does nothing to help the small startup as they are going to use a CDN which will be subject to the ISP.

2:) Yes, Netflix considers this a big problem. Because under current law there is nothing preventing Comcast (well not Comcast for a few more years but every other ISP) from making ComFlix and cutting out Netflix entirely. Heck, they could make a ComForbes and cut out your website entirely.

Netflix made a deal for preferred access so that it could sell its product to its customers. It HAD TO or it would GO OUT OF BUSINESS. Its akin to having a robber say I gave the robber my wallet when I only did so because he had a gun to my head. The FCC had the capacity to handle this up until 10 years ago when Internet was changed to “Information Service” rather than telecommunications service. Calling the Internet telecommunications again (common carrier) gets rid of this problem by forcing the ISP, which are monopolies in many areas (I have the choice of Time Warner or 3 megabit dsl) to upgrade their networks automatically when these situations arise. Given that the ISPs were highly profitable 10 years ago, I seriously doubt that this will impact their bottom line very much and maintains the Free Market.

RRimmel, Should ISP’s then come up with a Netflix package to charge only the customers using that extra high amount of bandwidth? Surely you do not want the 70 year old lady who has internet and would never use Netflix to pay for it. Bottom line is that 30% of ISP networks carry Netflix traffic. Netflix is getting a free ride from their serves to their customers and making a killing off of it. Who should pay for those upgrades? You do know that you do not get dedicated bandwidth from your ISP’s right? They charge their rates based on average usage and throughput levles. Not per megabit downloaded. Now that their networks are needing upgraded, they need to figure out how to get that money back. Trust me when I say it costs quite a bit to upgrade…

Bryan, Are you under the impression that everyone pays the same amount for internet? Time Warner in my area has something like 6 tiers of internet service. I have a higher tier service to carry streaming video, I wouldn’t need that service if I didn’t have Netflix. My 70 year old aunt has 5 Mb internet, and is satisfied. She isn’t paying for my Netflix viewing. You act like there is only one price for the internet and everyone is paying for it. I pay for a top tier package that ADVERTISES for being good for HD video steaming… and then they charge Netflix extra to deliver that content. If I didn’t have streaming video there is no way I’d be spending the extra money every month to get internet at the speed I have. And if netflix substantially raises their rates I’ll cancel Netflix … and the higher speed internet that I use to watch it.

And again, as the ISP sit around with another year of excellent profits I fail to see how upgrades are a serious issue. They managed for decades to both upgrade their networks and remain profitable. Now that they aren’t required to they have managed to raise their rates and not upgrade unless they absolutely have to. They are technology companies that haven’t been upgrading their infrastructure. They successfully raised rates repeatedly without upgrading the service while making excellent profits, now they have to upgrade and want to keep the excellent profits while shafting everyone else from the CDN to the end users. South Park has an excellent documentary on cable companies attitudes towards their end users, you may want to watch it but make sure you have enough bandwidth to view it.

Netflix made the deal because they didn’t have another choice if they wanted to continue providing good service to their customers. So they made a truce for the short term and now they’re fighting for the long term.

RRimmel, ISP’s are always spending money to upgrade, trust me. It is very expensive to upgrade the networks, again trust me. Now they have to be upgraded more quickly so Netflix can make more money off the ISP’s infrastructure. Netflix is using someone else’s network to sell their services. That cost should not have to be taken by all ISP customers. To answer this in your situation with TWC. You have a higher throughput that allows for streaming because you pay more. TWC will keep an eye on their networks to make sure that bandwidth is available for you. With Netflix, TWC notices that in order to keep that same service available for you, they have to continually upgrade the network which cost money. TWC is not going to eat those costs, they either must charge the entire customer base or find a way to charge the select customers using up all the bandwidth. This is a unique situation with one video source eating 30% of the bandwidth and profiting hugely by doing so.